What Happened to State and Local Governments?

real state and local government output, as measured by the BEA, has been effectively flat since 2001. To put it a different way, the stagnation at the state and local government level started way before the 2007 recession.

Pointer from Mark Thoma.
I suspect that there are two reasons for this. One is Medicaid. The other is pensions for retired workers. As these grow, the state and local governments have to spend more without generating any more of what would be counted as GDP. On Medicaid, I am not sure whether that spending is counted as a transfer payment (not GDP) or spending on health care (GDP).

Comments and Sharing

Could someone please explain that graph? Other than saying it came from the BEA (which stands for what?), he gives no source documents. I assume that "output" of states stands for spending? So does the graph say that spending is stagnant or is it spending as a percent of GDP? The graph doesn't tell us much of anything.

I am surprised if it really means that state spending hasn't increased for the last 5 years. But that's probably a good thing, because of the explosion in spending the previous 40 years.

[Fair questions. Just to clarify one: BEA stands for the Bureau of Economic Analysis, a statistical division of the U.S. Department of Commerce. The BEA releases economic data of various sorts, including GDP and national income data, trade and balance of payments data, plus the regional and industry data that underlie those reports. Definitions can be found on their website.--Econlib Ed.]

FYI, the BEA counts Medicaid payments as a transfer (i.e. part of the personal income for the recipient.)

Are you sure about that? It's probably counted as personal income on the GDI side of the ledger - but I'm pretty sure that on the 'production' side of the ledger it is included under 'Personal Consumption Expenditures - Health Care'. It's not included under the "Governement" category as production. It's not all that clearly laid out, but here's the BEA's GDP Primer - on page 9 it is explicitly stated that Medicaid is not included under the government category.

Again to summarize - GDP has two sides of the ledger - income and production. The two match in theory. Medicaid and other transfer payments are included as personal income on the income side, but Medicaid is included under health-care spending on the production side (just as the portion of seniors' social security checks that are spent on Blue Plate specials appears as Personal Consumption Expenditures - Services).

Splitting hairs (on Thanksgiving no less) but its not strictly speaking Medicaid that's being counted under PCE, but the medical services rendered that are paid for by Medicaid. So, I agree that Medicaid goes in on the GDI Side, which equals the expenditures on medical services on the GDP side, but the two are not the same thing, really.

But Medicaid is one of the few items where the GDI = GDP will be closest, since Medicaid funds can only be spent on health care.

And as to Arnold's specific question: On Medicaid, I am not sure whether that spending is counted as a transfer payment (not GDP) or spending on health care (GDP). - while it's phrased as a trick question (since the answer is in a way "both") - the statement "not counted as GDP" is clearly incorrect, while the statement "counted as...spending on health care (GDP)" is definitively true.

Blogging software: Powered by Movable Type 4.2.1.
Pictures courtesy of the authors.
All opinions expressed on EconLog reflect those of the author or individual commenters, and do
not necessarily represent the views or positions of the Library of
Economics and Liberty (Econlib) website or its owner, Liberty Fund,
Inc.

The cuneiform inscription in the Liberty Fund logo is the
earliest-known written appearance of the word
"freedom" (amagi), or "liberty." It
is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash.